Does Everyone Pay Social Security Tax?

Social Security tax is a federal payroll tax that funds retirement, disability, and survivor benefits. Authorized under the Federal Insurance Contributions Act (FICA), it is a mandatory contribution for most U.S. workers. The collected funds are pooled to pay benefits to current retirees, people with disabilities, and surviving family members, rather than being held in individual accounts. On a paystub, this deduction is typically listed as FICA or Old-Age, Survivors, and Disability Insurance (OASDI).

The General Rule for Workers

For most individuals, the obligation to pay Social Security tax is determined by their employment status. Workers fall into two main categories: employees or self-employed individuals, each with distinct methods for handling this tax.

Employees of a business have their Social Security tax obligations handled through payroll withholding. This law mandates that the tax is split evenly between the employee and the employer. The total Social Security tax rate is 12.4% of an employee’s wages; the employee is responsible for 6.2%, and the employer is also responsible for a matching 6.2%. Employers are required to deduct the employee’s share from their gross pay each pay period and remit the combined amount to the federal government.

Individuals who work for themselves are subject to the Self-Employment Contributions Act (SECA). Under SECA, a self-employed person is responsible for paying both the employee and employer portions of the Social Security tax, totaling 12.4%. This tax is not paid on gross revenue but on 92.35% of the individual’s net earnings from their business activities. Self-employed individuals typically pay their SECA taxes through estimated tax payments or when they file their annual tax return.

The Social Security Wage Base Limit

Social Security tax is not collected on an unlimited amount of a worker’s earnings each year. The federal government sets an annual cap on the income subject to this tax, known as the Social Security wage base limit. This threshold is adjusted most years to account for changes in the national average wage index.

For the tax year 2025, the Social Security wage base limit is $176,100. This means that once an individual’s year-to-date earnings exceed this amount, they will no longer have Social Security tax withheld from their pay for the remainder of the year. The employer also ceases to pay its share of the tax on that employee’s earnings above the limit.

To illustrate, consider an employee who earns a salary of $220,000 per year. This individual will pay the 6.2% Social Security tax only on the first $176,100 of their income. Any wages earned above this limit are not subject to the Social Security portion of FICA tax for the rest of the calendar year. This is a limit on the amount of income taxed, not a complete exemption from the tax itself for high-income earners.

Exempt Employment and Wages

Certain types of employment and specific categories of workers are exempt from paying Social Security taxes. These exemptions are narrowly defined and apply to situations with alternative retirement provisions or where employment falls outside standard definitions. This means exempt individuals do not contribute to Social Security and generally cannot collect benefits based on that work.

Exempt workers include:

• State and local government employees who participate in a qualifying employer pension plan, such as public school teachers, firefighters, and police officers.
• Students who work at the school, college, or university where they are enrolled, provided the work is incidental to their primary purpose of education.
• Specific non-resident aliens in the U.S. on a temporary basis, such as those with F-1, J-1, M-1, or Q-1 visas, for wages related to their visa’s purpose.
• Members of certain recognized religious groups that are conscientiously opposed to public or private insurance and make provisions for their dependent members. This requires filing IRS Form 4029.
• A child under the age of 18 who is employed by a parent in an unincorporated family business.

Income Not Subject to Social Security Tax

The foundation of the Social Security system is a tax on earned income from labor. Consequently, forms of income not derived directly from employment or self-employment activities are not subject to Social Security tax. This distinction separates payments for work from returns on investments or other assets.

Income generated from capital is generally excluded from the Social Security tax base. This includes dividends from stock ownership and interest earned from savings accounts or bonds. Capital gains, which are profits from the sale of an asset like real estate or securities, are also not considered earnings for Social Security purposes.

Other financial inflows not connected to work are also exempt. Gifts and inheritances do not count as earnings and are not subject to Social Security tax. Distributions from pension plans, 401(k)s, and other qualified retirement accounts are not taxed for Social Security. Rental income from real estate is typically not subject to this tax unless the recipient is a real estate professional.